Inflation and the price of food and fuel all continue to rise.
Salaries are increasing but are not expected to keep pace with inflation.
Rent prices are rising 4x faster than income.
That’s the bad news.
But wait, there’s more bad news: financial distress can weigh heavy on the average consumer, and ongoing stress about money has been linked to problems with both mental and physical health. For many people, adding to the anxiety is the helpless certainty that they could make ends meet if only they could get out from under the crushing weight of existing debt.
Now the good news: there are options! You probably know at least one person who filed bankruptcy and eliminated most, or all, of his/her debt. Bankruptcy is a great option – under the right circumstances – but it’s not the only option, and it’s not always the best option. In some cases, debt settlement is the better choice. Below are some things to consider when deciding what’s right for you.
What is debt settlement?
Debt settlement is simple – you negotiate with a particular creditor to reduce the amount you have to pay that creditor. The terms of a debt settlement can be anything that you and the creditor agree to. Most commonly, a creditor agrees to settle for less than the total amount owed, in exchange for a lump sum payment of the reduced amount. For example, you owe $3,500, and the creditor agrees to accept a one-time payment of $2,000 to settle the debt – the unpaid portion of the debt is “canceled.” In another common debt settlement scenario, you agree to pay the creditor the entire amount due, but the creditor agrees to accept payment over a period of time with no additional interest.
What is Bankruptcy?
Very simply put, bankruptcy helps you achieve a financial fresh start by allowing you to eliminate, reduce, or repay (over a 3-5 year period) your debt. Some debts are unaffected by a bankruptcy case (like student loans), but under the right circumstances, most consumer debt can be reduced or eliminated. **Keep in mind that this is a greatly over-simplified explanation used for purposes of this article only. A bankruptcy case involves a complete and often complex analysis of your entire financial situation, including all of your debts and other liabilities, your assets, your income and expenses, your financial history, and a multitude of other factors. As such, it cannot be fully explained here.**
Let’s look at a comparison of debt settlement vs. bankruptcy:
|Pay less than 100% of the settled debt||Pay 0% to 100% of total debt owed, depending on the specific circumstances|
|Can resolve individual debts one at a time Can resolve each debt differently||Have to deal with all debts at once All creditors have to be treated the same|
|Cannot help with immediate financial emergencies, like mortgage foreclosure or eviction May be able to stop a wage garnishment||Can stop mortgage foreclosure or eviction action immediately when filed Allows a period of time to catch up on mortgage or rent payments Stops a wage garnishment|
|Fast – can resolve debt in a matter of days or weeks||The simplest cases last a few months Cases involving debt repayment (curing mortgage arrears, etc.) take 3-5 years|
|Usually have to come up with a lump sum of money||No lump sum required|
|Typically no formal requirements to qualify, particularly with a lump sum payment settlement||Not everyone qualifies for bankruptcy relief|
|Settlement amount can be anything that the creditor agrees to||Amount to be paid is determined by the bankruptcy laws and a complete review and analysis of debtor’s finances (past, present and future)|
|“Canceled” debt likely considered income for tax purposes (creditor will issue a form 1099-C for canceled debt greater than $600)||Debt “canceled” through bankruptcy is not considered income for tax purposes|
|Easier access to future credit||Can take longer to rebuild credit|
|Can make debt worse if you fall into the trap of funding the debt settlement with credit from a different source (the “robbing Peter to pay Paul” method)||Once successfully completed, all debt is resolved|
|Can quickly improve your credit score by eliminating a delinquency from your credit report||Remains on your credit report for 7-10 years|
As you can see, there are advantages and disadvantages to both debt settlement and bankruptcy. Generally speaking, debt settlement is the better choice for dealing with a small number of non-emergent debts. Bankruptcy is the best choice for handling crisis debts (mortgage foreclosure, eviction, imminent bank levies), and for achieving a complete financial fresh start. Ultimately, which is best for you depends on the facts of your specific situation. It’s always a good idea to seek the advice of an attorney who has extensive experience with both debt settlement and bankruptcy; someone who can fully explain all of your options, can help you decide which option is best for you, and can help you achieve the result you’re hoping for.